Required Reading: How Does the VIX Index Work?

For those new to trading the VIX and volatility, the always outstanding Six Figure Investing has written a very nice primer on the VIX index. Six Figure’s primers are always highly recommended.

Just to clarify the relationship between the VIX index and what we do:

We trade VIX ETPs (like XIV and VXX). VIX ETPs track a specific mix of VIX futures. VIX futures target the future value of the VIX index. In summary: VIX index -> VIX futures -> VIX ETPs.

On a less pleasant note, the short-term VIX ETP XIV was down -3.5% on the day. As I’ve written about previously, these type of daily moves, while huge for most assets, are business as usual with VIX products – the inherent cost of capturing big returns.

Since mid-2004, XIV would have lost in excess of -3.5% about 27 times per year, or more than twice per month on average. Business as usual.

Good Trading,
Volatility Made Simple

Wonk note: data prior to the launch of XIV and VXX has been simulated. We’re able to do this accurately using a combination of the indices and the futures data on which these ETPs are based. Read more about simulating data for VIX ETPs.

Posted in Other Goodies.